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Spain Yield Spread Narrows to Lowest Since 2010 Before Fitch

(Bloomberg) -- Spanish bonds led a rally among peripheral euro-area securities on speculation the nation’s debt rating could be upgraded on Friday.

The extra yield that investors demand to hold the nation’s 10-year notes over comparable German debt narrowed to the least since before the euro crisis engulfed the region. Spain is rated BBB+ at Fitch Ratings, and a one-notch improvement would take the kingdom to A territory.

“It’s very likely that we could see rating increase on Friday,” said Jaime Costero, a fixed-income strategist at Banco Bilbao Vizcaya Argentaria SA in Madrid. “The economic fundamentals look good and uncertainty is less likely to weigh on the decision now than it did last year.”

The yield on Spain’s 10-year bonds fell four basis points to 1.46 percent as of 11:40 a.m. in Madrid. The yield premium over comparable German bunds narrowed four basis points to 88 basis points, the least since April 2010.

While political tensions flared again in the Catalonia region this week, investors seemed to consider it as noise, taking some respite in Prime Minister Mariano Rajoy’s tough stance on the region’s rebellion. While separatists control key positions in the Catalan parliament that could facilitate their agenda, they have been warned by the central government that the chamber may be suspended again if it tries to sidestep constitutional orders.

Rajoy dismissed the entire regional administration in October following an ill-fated unilateral declaration of independence from Spain.

Economic Growth

An upgrade by Fitch could spark further declines in the spread, according to BBVA, which sees a narrowing to about 80 basis points on the move, which may also trigger greater appetite for Spanish debt from buyers looking for higher-rated bonds.

The appetite for Spanish debt is being supported by an economy that is headed into its fifth consecutive year of expansion. The government forecasts gross domestic product will grow at least 2.5 percent this year as risks pegged to Catalonia recede, while the deficit narrows further to less than 3 percent of output, boosted by rising tax revenue as the job market recovers.